Lehman: The Moral Hazard Unwind

Why should Lehman’s strategy right now be run by Tim Geithner? I’m not sure, but according to Robert Teitelman that’s effectively what’s happening. Right now Lehman is still too big to fail — but if the plan announced today goes through, that might not be the case much longer:

The core question for the Fed is how to insure that, if it came to that ugly eventuality, Lehman could fail and make the least splash possible.

So now the firm has provided an answer: spin off the commercial real estate to shareholders; unload asset management; auction off bits and pieces that aren’t tied down. Plug the hole created by another mortgage hit and stagger on, praying for better days. From the Fed’s perspective, all this is swell. At a certain point, the Fed doesn’t need to worry as much about a Lehman that is heading toward midtier status, particularly since the firm has been deleveraging anyway. From Lehman’s perspective, this "right-sizing" will eventually make it expendable.

Effectively, this is the slow unwinding of the moral-hazard play. If you own Lehman debt, don’t assume you’ll get off as scot-free in the event of the bank failing as you did circa Bear Stearns.